The 225-issue Nikkei Stock Average (1804610) ended up 0.4% at 16,845.96 while the broader Topix index shed 0.05% to close at 1,615.89.

"Economic fundamentals are still solid but market sentiment is weak," said Nomura Securities equities strategist Hisao Matsura in Tokyo.

The Bank of Japan's influential tankan survey of business sentiment showed confidence among large manufacturers was unchanged in the three months through September, rebuffing expectations for a moderate decline in the outlook. See full story.

Stocks succumbed to profit taking early in the afternoon as the initial momentum from the tankan began to wane.

In other regional trading, Australia's S&P ASX/200 reversed direction late in the session to close down 0.06%, New Zealand's NZX-50 climbed 0.3% and South Korea's Kospi index added 0.8%.

Markets in Hong Kong were closed Monday and those in mainland China will shut for the week for national holidays.

The yen eased to 115.56 against the U.S. dollar in late Asian business hours, down from its level of 114.87 yen before the release of the tankan. The survey showed large manufacturers expect the yen to trade around 114.33 to the dollar in the second half of fiscal 2007.

"The survey indicates that the financial market turbulence has had little impact on business sentiment so far and that the recovery in the corporate sector has continued in the third quarter," Lehman Brother chief Japan economist Hiroshi Shiraishi wrote in a research note emailed to clients Monday. "The report does not change the impression that the recovery in Japan is being driven by exports."

He said the September tankan does not provide decisive data in helping the Bank of Japan time its next move on interest rates.

The Tokyo market was pricing in a 7% chance the Bank of Japan would lift interest rates at its monthly meeting in October, up from a 6% chance before the tankan's release, according to calculation by Credit Suisse.

Mitsubishi Estate (8802) led home-builder stocks lower after data released Friday showed housing starts in August fell 43.3% from a year earlier. Analysts said the declines were related to the introduction of more stringent building regulations.

Shares of robot maker Fanuc (6954) led gains among suppliers of industrial equipment on expectations they will benefit from higher capital spending plans by large firms. The tankan reported large firms plan to boost spending by 8.7%, up from 7.7% in June. Shares of Fanuc added 1.2%.

In Sydney, shares of BHP Billiton
BHP, -1.08%
(BHP) ended 0.1% lower on profit taking. Shares touched an all-time high of A$45.10 mid-session after gold rallied to its highest close since 1980 in New York trading Friday. Shares of mining peer Rio Tinto Plc. (RIO)
RIO, -2.30%
added 0.6%.

Crude for November delivery rose 31 cents a barrel to $81.97 in late Asian business hours. The front-month energy contract fell $1.22 in New York trading Friday.

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